Social Connections and Group Banking

Karlan, Dean S.

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Social Connections and Group Banking

40 Pages Posted: 7 Jun 2005

See all articles by Dean S. Karlan

Dean S. Karlan

Yale University; Northwestern University - Kellogg School of Management; Innovations for Poverty Action; Massachusetts Institute of Technology (MIT) - Abdul Latif Jameel Poverty Action Lab (J-PAL); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

There are 2 versions of this paper

Date Written: June 2005

Abstract

Lending to the poor is expensive due to high screening, monitoring, and enforcement costs. Group lending advocates believe lenders overcome this by harnessing social connections. Using data from FINCA-Peru, I exploit a quasi-random group formation process to find evidence of peers successfully monitoring and enforcing joint-liability loans. Individuals with stronger social connections to their fellow group members (i.e., either living closer or being of a similar culture) have higher repayment and higher savings. Furthermore, I observe direct evidence that relationships deteriorate after default, and that through successful monitoring, individuals know who to punish and who not to punish after default.

Keywords: Microfinance, group lending, informal savings, social capital

JEL Classification: O12, O16, O17, Z13

Suggested Citation: Suggested Citation

Karlan, Dean S. and Karlan, Dean S., Social Connections and Group Banking (June 2005). Available at SSRN: https://ssrn.com/abstract=739212